Canadian Capitalist

Sometimes authors or publishers offer to send me a book for a possible review. I usually accept with every intention of reading the book and writing a review. Unfortunately, as I didn’t have the time to read the following books - I didn’t get past the first chapter on two of the books and skimmed through the other two - I thought I’d at least acknowledge receiving them.

The Young Investor by Dan Fournier. Subtitled “The North American Guide to Investing Online”, this appears to be a comprehensive book for the investor who is just starting out. I read two chapters “General Investing Guidelines & Tips” and “Avoid Mutual Funds…Embrace Exchange-Traded Funds” and found that the author writes well and gives solid advice. There is an intriguing chapter at the end titled “The Offshore Advantage” in which the author suggests that “all investors, at some point, should move a portion of their assets offshore”; something that I don’t recall ever reading in a finance book. The book has 336 pages and is available in paperback format for $24.95 from The Young Investor website.

Invest Now by A. Dawn. The author is a fellow blogger (A. Dawn Journal) who has self-published a book that he says is “jam-packed with timely information and timeless advice for the beginning Canadian investor”. The book starts off well-enough discussing different types of investment accounts but I found it a little light (it’s only 136 pages including blog posts reprinted from the author’s blog) on information on what an investor should actually do after opening an account. The author does suggest an “easy portfolio” which has a 25% allocation to non-Canadian Income but no rationale was given in the subsequent pages. The book is listed at $15.95 (US) and is available from Amazon.ca and more details can be found on the author’s website.

The Brainwashing of the American Investor by Steve Selengut. The author lost me in the first chapter where he claims that “Trading absolutely always produces more growth in capital, more growth in income, and more inflation insurance than any other strategy”. Right! Fortunately, Million Dollar Journey did read the book and wrote a review.

A Million Bucks by 30 by Alan Corey. The enterprising young author chronicles his journey from his mom’s basement to a seven-figure net worth by the time he turned thirty. Mr. Cheap wrote a review of the book yesterday and Thicken My Wallet featured an interview with Alan on his blog.

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Last week, it was widely reported in the press that Telus was ordered to refund the “network access charge” ($2.95 per month) that was slapped on customers who did not use its long-distance network. The news is a reminder to check your phone bill and see if you are still paying a fee for the privilege of making long-distance calls through your local phone company.

Bell, for instance, charges a $5.95 monthly long distance network charge, which it claims was introduced “to support investments to enhance and expand our network” and its best per minute calling rate within Canada and to the U.S. is 5¢ per minute. Telus (TSX: T) charges a $4.95 per month “administration fee” for its long-distance plans and if you don’t pay a “subscription fee” on top of that, calls within Canada cost 7¢ per minute. To call the U.S. requires a monthly subscription of at least $1.95 and the per minute rate is 7¢ per minute. It’s the same story with Primus - a $4.95 monthly network fee and calls within Canada and to the U.S. at 5¢ per minute.

Fortunately, long distance is so competitive that there is no reason to pay any kind of monthly fees to get low rates. One example is Yak, which doesn’t charge any monthly fees and offers calls to Canada and the U.S. for 3.5¢ per minute (If you know of any others, do let us know in the comments). Check your local flyers - the options are plentiful and if you are still paying any kind of long-distance monthly fee, you could switch and painless save at least $5 per month.

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1. Warren Buffett took questions from yet another group of business students and Fortune magazine was there to record his answers.
2. ETFs were supposed to be a good thing that offered broad diversification in a low cost, tax efficient manner. Trust Wall Street to spoil the fun.
3. Ellen Roseman wrote about online resources available for picking a discount broker (and thanks for the mention!).
4. Rob Carrick notes that savvy mortgage borrowers can knock 0.6% off prime a variable-rate mortgage and 1.5% off the “posted” rate for a five-year fixed-rate mortgage.
5. Prem Watsa has been called Canada’s Warren Buffett. The Star reports that the chair of Fairfax Financial Holdings (TSX: FFH) is extremely bearish on equities.
6. Tim Cestnick writes in The Globe and Mail that doing the little things right can help save tax.

Blog Roundup:

1. Triaging My Way to Financial Success highlighted Rob Carrick’s article on mutual funds that have increased the MERs since 2003. Even if MERs stayed the same, the fund companies are not passing on the 1% GST cut to the customer.
2. Now that spring finally seems to be here, Canadian Financial stuff reminds us to take the snow tires off the car.
3. Squawk Fox started a series of posts about succeeding in most people’s biggest asset - their careers.
4. Four Pillars wrote about using the new Tax-Free Savings Account for an emergency account.
5. Million Dollar Journey reviewed TradeFreedom, a deep discount broker.
6. Middle Class Millionaire offers the secret to financial success.
7. Thanks to Gather Little by Little for including my post on Another Reason to Avoid Hedge Funds in the Carnival of Personal Finance.

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You can’t make up things like this if you tried. Jonathan Chevreau recently wrote about the second annual Lipper awards that gives new meaning to celebrating mediocrity. In addition to four overall awards, thirty (30) Lipper Awards were given to mutual funds in each of the 1 year, 3 year and 5 year categories and a modest twenty (20) were given out in the 10 year category. Awards are given for every possible combination of categories - for example, there is Canadian Neutral Balanced, Canadian Equity Balanced, Canadian Fixed Income Balanced, Tactical Balanced, Global Equity Balanced, … well, you get the idea.

Now, for the really funny part in The Wealthy Boomer post: “if you’re such a sad-sack fund company that you couldn’t muster up a single win in the 113 categories, there may yet be hope for you. You can order a large Lipper trophy for just $155, a medium one for $119 or a small one for just $95″. Yep, “the instantly recognisable symbol of fund performance and success” can be ordered on this website.

No wonder, Tom Bradley of Steadyhand mutual funds is ecstatic about winning a coveted award for Best Mutual Fund Performance for the Week of July 23rd.

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Taxes have a huge impact on investment returns. The Bogleheads Guide to Investing cites a study by Charles Schwab that found that for the 30-year period from 1963 to 1992, $1 invested in U.S. equities would have grown to $21.89 in a tax-deferred account but only to $9.87 in a taxable account for a taxpayer in a high tax bracket.

Index funds are tax efficient in two ways. First, index funds can be bought and held “forever” with high confidence that they will outperform the vast majority of investors, who are presumably chasing performance and buying “hot” funds and selling them when they almost invariably turn cold. Second, the turnover of the index funds is extremely low because changes are made only when stocks are added to the index or when stocks leave the index or when companies merge, are taken over or go bankrupt. Hence, realized capital gains that are distributed to the investor and taxed in her hands are very low.

Consider the Vanguard Total Stock Market ETF (VTI) whose portfolio turnover for the past five years were 4%, 4%, 12% (due to a change in the fund’s target index), 4% and 2% respectively. In contrast, it is impossible to tell what the turnovers for the larger U.S. equity mutual funds in Canada because such information is not available in the prospectus. Leith Wheeler, to their credit, publish such information for their U.S. Equity Fund and reported a turnover of 17% (to June 2007) and 25% in 2006. The Vanguard Europe Pacific Fund (VEA) also has very low turnover: 6%, 4%, 4%, 5% and 9% in the past five years. The low turnovers will result in lower realized capital gains distributed to investors over time and result in higher after-tax returns when compared to actively managed funds.

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A good definition of efficient markets can be found in a paper by Eugene Fama titled Random Walks in Stock Market Prices:

An “efficient” market is defined as a market where there are large numbers of rational profit-maximizers actively competing, with each trying to predict future market values of individual securities, and where important current information is almost freely available to all participants. In an efficient market, competition among the many intelligent participants leads to a situation where, at any point in time, actual prices of individual securities already reflect the effects of information based both on events that have already occurred and on events which as of now the market expects to take place in the future. In other words, in an efficient market at any point in time the actual price of a security will be a good estimate of its intrinsic value.

While academics like Fama set store by EMT, on the other side of the fence are people like Warren Buffett whose tremendous long-term track record appears to contradict the theory. Buffett himself has weighed in on the validity of EMT noting that “observing correctly that the market was frequently efficient, [efficient market theorists] went on to conclude incorrectly that it was always efficient. The difference between these propositions is night and day”. In this battle of giants, which side would you pick?

At first glance, the debate seems to be of enormous importance to indexers. If EMT is true and stock prices reflect all publicly known information and are subsequently fairly valued, then it follows that it is futile to try to beat the market and indexing would be the only way to invest.

But what if EMT isn’t always true? We all know that people can be very foolish at times; so perhaps, smart investors can take advantage of other people’s foolishness. To paraphrase Buffett, maybe it’s possible to find flowers that are priced like weeds. However, there is a fly in the ointment (or a caterpillar in the salad, as P. G. Wodehouse would say): even if stock prices are occasionally (or even frequently) mispriced, can average investors (or indeed the average fund manager) readily take advantage of it? Here, the evidence is overwhelming that beating the index consistently is extraordinarily difficult because investors have to overcome what John Bogle calls the relentless logic of humble arithmetic - investors, on average, can only earn the returns that the market Gods provide less expenses. Thus even if EMT turned out to be invalid, a strategy of earning market returns while keeping expenses low is still a winning strategy.

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The Dividend Guy blogged about his top investing mistakes and challenged other bloggers to do the same. Over the years, I’ve committed my share of mistakes and have frequently blogged about them. Regular readers know of blunders such as having too much tied up in employer stock or buying into labour-sponsored funds for the “tax savings”. Still, it wasn’t difficult to come up with this list:

• Chasing Performance: At one time, my portfolio held one venture capital fund, one Science and Technology Mutual Fund, Yahoo! (YHOO), JDS-Uniphase (JDSU), Nortel Networks (NT), Millennium Pharmaceuticals (MLNM), Intel (INTC) and TD Bank (TSX: TD). Since I started investing in 2000, the reason for the motley collection of over-priced and speculative holdings was simply chasing recent performance without realizing that investors don’t earn past returns. The only stock that I made any profit on was Yahoo! and the only stock I hold to this day is the odd man in the list - TD Bank.
• Not Paying Attention to Expenses: It’s bad enough buying into the latest investment craze; it’s worse to find a high-priced way to do it. The Science and Technology fund I mentioned before sported a MER of 2.5% and came with a 5-star rating in the list of “best” mutual funds. I probably might have been better off speculating with a low-cost fund like the QQQ and saved the MER.
• Focusing too much on the minutiae, less on the big picture: In my early years of investing, I spent too much time on the minutiae of investing - should I buy TD Bank (TSX: TD) or Royal Bank (TSX: RY)? Should I buy Enbridge (TSX: ENB) or TransCanada (TSX: TRP)? - and less on the big picture -the overall asset allocation (cash, bonds, stocks and REITs), splitting equities between Canadian and foreign stocks etc. Not to mention the time and effort spent on the minutiae was fairly useless and a plan vanilla index fund would have done just as well or better.

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1. Now that taxes are fresh in our minds, it is time to plan to save taxes for 2008. Sixteen ways to beat the taxman from the Financial Post.
2. Jonathan Chevreau says that QuickTax Web has been radically revamped this year and is now “neither quick nor painless”.
3. Tim Cestnick says that paying down debt with the income tax refund may be a good idea.
4. Common mistakes that people make on their tax returns from the Financial Post.
5. Students can file their taxes for free via UFile.ca courtesy of an arrangement with the Canadian Federation of Students.
6. The CRA offers free Tax Clinics for low-income individuals and families through the Community Volunteer Income Tax Program.
7. Thanks to Scott for pointing out that you can opt out of junk mails through the Red Dot Campaign.
8. 40-year mortgages have extended the real estate boom but Ellen Roseman writes in The Star that they hold dangers for homeowners.

Blog Roundup will return next week. Have a nice weekend everyone!

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1. I finally completed our tax returns and filed it through NETFILE over the weekend. As I noted before, I finally bid adieu to QuickTax and UFile didn’t cut it for me either. I gave my copy of UFile to a friend and used StudioTax for our taxes this year.
2. Other than a few minor glitches, I am very happy with StudioTax and would continue to use it in future years. There are a few minor annoyances with StudioTax though. For instance, if you hold joint savings and investment accounts with your spouse, you’ll have to manually split the amounts in all the boxes in the T3, T5 slips etc. Also, if you receive multiple RRSP contribution slips, you’ll have to add up the contributions manually because only two boxes are available in the wizard - one for the contributions from March 2 to December 31, 2007 and the other for contributions from January 1, 2008 to February 29, 2008. While these are not major concerns, the manual calculations increase the likelihood of user error. The developers behind StudioTax said they will consider these suggestions for the next year.
3. Many readers are reporting problems with slow support at UFile. The only way to contact UFile is through email and a response might take as long as five business days. Reader Shea noted if you’ve used UFile.ca in previous years, there is no way to import data into UFile for Windows. And I am not sure if QuickTax Web allows data to be imported into QuickTax software either.
4. For some reason, I get a ton of complaints via email about tax software. I should clarify that we are not affiliated with any of the tax software vendors and the earlier reviews are simply my own opinions as a consumer. If you have a concern or comment, contact QuickTax and UFile directly.

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Is there anything more annoying than telemarketers who seem to have the uncanny ability to call at the most inconvenient times? It is no wonder that the Do Not Call registry in the US has become so popular and the Canadian list is slated to become operational in late 2008. But political parties, print media, charities, companies with which we deal already and survey companies are exempt from the proposed do-not-call registry. Most of the calls we get are for surveys, newspaper subscriptions and our bank anyway, which makes me wonder about the point of the registry.

Michael Geist, a professor at the University of Ottawa, has launched a website to complement the federal registry. Opting out of calls from many of the exempt organizations is very easy through the iOptOut website: register up to three phone numbers, select the organizations which you don’t want to hear from and a do-not-call request is sent to all the selected organizations. When an organization receives a request, they are obliged under current privacy laws to respect it.

I’ve registered all our phones through the iOptOut registry and will also do so when the federal registry goes live. If we still keep getting telemarketing calls from foreign countries, I might end up buying the TeleZapper, which I hear is pretty good at zapping telemarketing calls.

[Update: Thanks to George for pointing out that the Canadian Marketing Association also operates a Do Not Contact service. Click here to register for the CMA website.]

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